An FCA report into cryptocurrencies has revealed that 2.3 million UK adults now hold cryptoassets, up from 1.9 million last year, leading the Regulator to warn on the need for a greater understanding among consumers that the sector remains largely unregulated and investors should be aware that they could “lose all their money”.
The consumer research found that attitudes towards cryptocurrencies have changed over the last year, with 38% of crypto users regarding them as a gamble compared to 47% last year.
Enthusiasm for the asset is also growing, with over half of crypto users saying they have had a positive experience so far and are likely to buy more going forward. Similarly, the number of people who regretted buying cryptocurrencies fell from 15% to 11%.
However, the level of overall understanding of cryptocurrencies is declining, with only 71% of people correctly identifying the definition of cryptocurrency.
The FCA warned that with growing interest in the asset, there needs to be a greater understanding among consumers that the sector remains largely unregulated.
Sheldon Mills, executive director, consumers and competition, FCA, said: ““It is important for customers to understand that because these products are largely unregulated that if something goes wrong they are unlikely to have access to the FSCS or the Financial Ombudsman Service. If consumers invest in these types of products, they should be prepared to lose all their money.”
The research marks the FCA’s fourth consumer publication into cryptoassets and forms part of the watchdog’s strategy to develop its thinking on the potential harm and benefits to consumers.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The UK’s financial watchdog is on alert, sniffing out fresh danger after its research shows the number of people holding crypto assets has risen by more than a fifth in just a year.
“As more traders have piled in, and awareness has grown, the perception is that they have become less risky. That is a dangerous financial attitude to take, given the volatility of cryptocurrencies and tokens. It’s no surprise that the FCA has used the publication of this research as an opportunity to issue a fresh warning that people risk losing all their money if they trade in crypto assets.”
Streeter said the dramatic rise in the Bitcoin price, which has seen it jump from just under $10,000 a year ago to just shy of $40,000 today, has made the regulator “extremely nervous.”
Streeter explained: “There is a danger that because of so many posts and tips swirling around on social media, people may have been persuaded to invest emergency savings to make a quick buck, leaving them without a financial safety net.
“The twists and turns in the crypto world are far from over and fresh gyrations in value are expected. Just in the last few weeks, jitters have been caused by a crackdown on paying in crypto currencies in China.
“For investors it’s important to bear in mind that the payments world is in a state of flux, and the rules of the future game have not yet been drawn up. Although it’s clear that cryptocurrencies in some form will find a place at the table in the financial system, given the interest by large companies and governments, it’s very unclear which of the thousands of coins and tokens will retain their value in the future and what role they will play.
“Given the distinct lack of certainty on the horizon, investors should only dabble at the fringes of their portfolio, and understand the risks they face.”
Bubble fed by ignorance
Rick Eling, investment director at Quilter, warned that the rise of cryptocurrencies is “nothing more than a bubble fed by ignorance.”
Eling said: “Hats off to those that have actually made money, and there’s nothing wrong with that. But cryptocurrency gambling is not investing. As responsible investors we fear for the safety of the majority, for the inexperienced, and for those whose investment expertise goes no further than an Instagram post that makes you feel like easy money exists. “The fact of the matter is that if someone can make a lot of money quickly, they can lose the lot just as quickly. That is pure gambling.”
Eling called for greater understanding of what constitutes investing, trading and gambling and how language of one category gets co-opted into others.
Eling said: “We often hear investors talk of ‘taking a punt’ or ‘hedging their bets’, but they’re playing down how complex their work actually is. In the same vein, we hear people pushing crypto scams with the language of serious investment, including words like ‘trading system’, ‘yield’ and ‘volatility’ when actually it is nothing more than a fraudulent scheme.
“People should instead look to get rich slowly and craft an investment strategy which takes into account how much you can realistically set aside each month to invest, your capacity for loss and appetite to risk given your investment objectives.”
Laith Khalaf, financial analyst at AJ Bell, said that while most consumers were acting sensibly, with the average holding value just £300, there remains a “dark underbelly” lurking in the figures.
“The fact that 14% of crypto buyers have borrowed to invest is simply terrifying. The extreme volatility and uncertain long-term outlook for crypto means holdings can be wiped out, leaving borrowers with nothing but their debt as a memento.
“Around one in five crypto buyers said they were driven by FOMO, which is never a good motivation for financial decisions. A similar proportion said they were buying crypto instead of shares or other investments, which suggests some consumers are leapfrogging traditional assets which can help to build long term wealth.”
Khalaf added: “Buying cryptocurrency is a dangerous financial activity and while many consumers appear to understand the risks, some are carelessly playing with fire. There is no clear path for cryptocurrency to achieve widespread acceptance as a means of exchange between consumers and businesses and the carbon footprint of crypto mining has further dented its credentials as a long-term alternative to the existing monetary system.”